World Bank's 2012 report for East African economies

Thursday, 03 November 2011 12:29

The contrasting developments in the business environments in the East African Community (EAC) were highlighted in the 2012 edition of the World Bank's ease-of-doing-business ratings (WBEDBR).The contrasting developments in the business environments in the East African Community (EAC) were highlighted in the 2012 edition of the World Bank's ease-of-doing-business ratings (WBEDBR)

Burundi qualified among the 10 most improved economies in the world in 2011, with its ranking rising from 177th in 2011 (adjusted from 182nd in the 2011 edition because of data corrections) to 169th place among the 183 countries surveyed. This constitutes a significant achievement for a country ranked among the poorest in the world, together with the Democratic Republic of Congo and Somalia, and still plagued by political violence. The improvement was on the back of measures introduced to facilitate dealing with construction permits and paying taxes, strengthen investor protection and resolve insolvency, illustrating that not much is needed to advance rapidly among the lower rungs in the WBEDBR.

Rwanda continued to rise in the ranking from 50th in 2011 (adjusted from 58th) to 45th on the back of efforts to facilitate starting a business, obtaining credit information and paying taxes. As a result, Rwanda now ranks second only to South Africa, in 35th place, in Africa, after overtaking Tunisia, in 46th place, and Botswana, in 54th place, since the publication of the 2011 edition in November last year. IHS Global Insight sees potential for a further increase in Rwanda's ranking on the back of, among other measures, the roll-out of savings and credit co-operatives and the continued development of the domestic financial market, as illustrated by ongoing initial public offerings and cross listings.

The encouraging developments in Burundi and Rwanda contrast with the meagre progress made in the main EAC economies, Kenya, Tanzania and Uganda, which all continued to slip in the WBEDBR. Kenya slipped from 106th in 2011 (adjusted from 98th) to 109th, Tanzania from 125th in 2011 (adjusted from 128th) to 127th and Uganda from 119th (adjusted from 122nd) to 123rd. This is particularly discouraging as a record 36 out of 46 sub-Saharan African economies improved business regulations in 2011, led by West African countries such as Côte d'Ivoire, Liberia and Sierra Leone. Kenya, Tanzania and Uganda join Angola, Benin, Chad, Ethiopia, Gambia, the Republic of Congo, DRCongo, Eritrea, Niger, Togo and Zimbabwe in slipping in the index.

Outlook and Implications

The deterioration in business conditions in Kenya, Tanzania and Uganda are in line with the development of their scores in the World Governance Indicators, also published by the World Bank, and Transparency International's Corruption Perception Index over the past decade, underlining that East Africa is steadily losing its traditional position as a comparatively well-governed region of sub-Saharan Africa. The failure in improving the business environment more markedly also contravenes the aims of the East African Common Market Protocol, nominally in place since 1 July 2010, to streamline business regulation within the five member countries and reduce non-tariff barriers to trade and investment.

The slip in Uganda's position is a result of changes that have increased the time taken to obtain a business licence and a lack of progress in other areas. We view it as particularly discouraging, given the advance in its ranking from 129th to 122nd in the 2011 edition and the need to improve the general competitiveness in the economy ahead of the commencement of domestic oil production on a commercial scale, tentatively scheduled for 2015, which is likely to stress the non-oil sector through intensifying cost pressures on skilled labour and other inputs.

Regimes need change

It is widely perceived, both domestically and externally, that a transition of power from the current entrenched regimes in Kenya, Tanzania and Uganda is needed to achieve a significant improvement in governance and business conditions and this appears to be further confirmed by the latest WBEDBR.

However, IHS Global Insight sees scope for improvement even with current regimes in power, with the ongoing scrutiny in the Ugandan parliament of government ministers accused of receiving bribes from foreign oil companies, and the success of the opposition Chadema party in the Tanzanian election in November 2010, indicating growing popular support for change. While recent elections in Tanzania and Uganda have extended the tenure of existing regimes to 2015 and 2016 respectively, the 2012 election in Kenya could bring a stronger commitment to improve governance and business conditions. Even if a victory for Kenyan prime minister Raila Odinga, the current front-runner in the 2012 presidential polls, would constitute a break from the country's traditional political elite, questions remain over his willingness and ability to take on vested interests and improve business regulations and government efficiency.

Economic reform

While IHS Global Insight views Burundi's success as reflective of it having collected "the low-hanging fruit" of economic reform, we see scope for continued improvement and ascent in the coming years. It is evident that the Burundian government, with the assistance of bilateral and multilateral development partners, is drawing on the impressive performance of Rwanda in using business and economic reforms as means to not only improve the economic situation and reduce poverty, but also to consolidate the peace following civil conflict. Recent news of political violence has, in our opinion, overshadowed positive developments not only on the business environment but also in the domestic hydro-electric power and mining sectors.

As mentioned, we also see potential for further improvement in the business environment in Rwanda, in particular in accessing financial services, both for corporates and individuals. While Nairobi will undoubtedly retain its status as the business hub of East Africa, because of its superior regional and international transport links, as well as its established domestic and international corporates, we see potential for Rwanda to attract further foreign direct investment targeting the wider Great Lakes region, in particular the eastern parts of the DRCongo.